PeopleSoft, Oracle to take their battle before judge today / Stakes are high in government's antitrust lawsuit

Benjamin Pimentel, Chronicle Staff Writer

Published
4:00 am PDT, Monday, June 7, 2004

The long-awaited Oracle antitrust trial starts today in San Francisco in what promises to be a hard-fought courtroom battle between the software giant and the Justice Department.

The stakes are high for both sides in a legal showdown that will explore the inner workings of the $25 billion-dollar market for software that companies use for such back-office tasks as managing payroll and keeping track of personnel records.

A ruling against Oracle by U.S District Judge Vaughn Walker would be a huge setback, perhaps a fatal one, in the Redwood City's firm's costly campaign to buy PeopleSoft for $7.7 billion.

The trial offers the Justice Department a chance to showcase its ability to challenge big tech deals that it considers anticompetitive amid a wave of mergers and acquisitions in the tech industry.

A ruling against the government, though, would deal another legal setback to its antitrust unit after a 2001 court ruling that rejected its attempt to block an $825 million merger between SunGard Data Systems Inc., a business software company, and Comdisco Inc.'s data-recovery unit.

The trial also could have important implications for Silicon Valley. The final ruling could be influential in shaping the increasingly competitive, fast-changing market for back-office software.

The courtroom drama represents the latest chapter in a bitter corporate takeover battle between two of the world's biggest software firms and two of Silicon Valley's most controversial and flamboyant figures.

Oracle Chief Executive Officer Larry Ellison and PeopleSoft CEO Craig Conway are both scheduled to testify in the monthlong trial, along with executives from big companies such as IBM, Nextel Communications and Microsoft.

The Justice Department's main contention in this case will be that an Oracle-PeopleSoft merger would reduce competition by eliminating one of three softwaremakers serving big customers who buy entire packages of business software, leaving only Oracle and SAP of Germany.

Analysts say the government must convince Walker that if the merger goes through, there's nothing to stop Oracle from demanding higher prices from a group of the acquired company's biggest customers, who would have little choice but to pay up.

Oracle counters that such a group doesn't exist. The case is expected to revolve around that point, said Barry Harris, a principal at Economists Inc., a Washington consulting firm.

He said the government's argument is flawed because it would be impossible for Oracle to read its customers' minds to figure out who else they're considering as vendors for the software they need.

Part of the problem is that -- unlike other commodities, such as clothes or cars, which have generally known, fixed prices for all customers --

prices for business software are typically set through confidential negotiations with each customer.

Analysts say the government must show that Oracle has a way to identify which customers would be at its mercy if the merger took place.

The Justice Department's witness list includes companies such as Greyhound and Verizon Communications as well as the state of North Dakota. They are expected to testify that a merger would harm customers and lead to higher prices.

In a pretrial brief, the government said it will present internal Oracle documents and customer testimony that would "colorfully illustrate how head-to- head competition" between Oracle and PeopleSoft benefits users by keeping prices down.

Some analysts say the Justice Department has the upper hand in this case because its witness list includes more customers than Oracle's. Those customers are expected to express their fears that the planned merger would lead to higher prices and products that don't meet their expectations.

"I think based on the witness list, I would handicap this in favor of the government," said Charles Biggio, an antitrust attorney in New York. "You'll expect the government to win if the customers are motivated enough to take the stand."

Oracle rejects that assumption, saying that parading customer-witnesses would be monotonous and pointless. Its witness list includes some customers, but mostly relies on industry and economic experts along with executives from the company and its rivals, including Ellison and Conway.

The company says the government's analysis of the high-end corporate software market doesn't make sense because it offers a narrow view.

Some analysts like Oracle's chances in the case, referring to a federal court ruling in late 2001 in a case involving an attempt by SunGard, a business software company, to buy Comdisco's disaster services business.

The Justice Department sued SunGard, saying the purchase would allow it to dominate the market for computer systems that back up company data.

The court ruled against the government, saying it had failed to consider other vendors offering similar services and products.

Oracle is raising a similar argument, saying the corporate software market is bigger than the government's definition and that other smaller software companies could easily fill the void that would be created if it buys PeopleSoft.

"I think the government has a difficult burden because these markets are so complicated and there are so many different choices," said Michael Katz, a professor at the Haas School of Business at UC Berkeley.

Harris of Economists Inc. said the government might be overestimating Oracle's ability to gouge customers.

The reasoning goes along these lines: In choosing customers to pay higher prices, Oracle would essentially be making calculated guesses in an undefined market.

If Oracle guesses correctly, it can pick up an extra 5 to 10 percent in profit, he said. "If they guess wrong (and the customer picks another vendor), they lose the full profit, and that's a big number," Harris said.

The Justice Department has said that smaller players, such as Lawson, don't have the ability to compete with the major business softwaremakers because they don't offer the broad suite of software needed by major customers.

It also argues that the high-end corporate software market is so difficult to penetrate that if the merger is approved, Oracle and SAP would have the field to themselves for at least two years afterward.

Some analysts dispute that contention, saying it wouldn't apply to an industry known to go through major changes within 18 months. "These markets are much more easily entered than the traditional brick and mortar industries, " said Hillard Sterling, a Chicago antitrust lawyer.

Microsoft's entry into the marketplace could play a decisive role in the trial. The government doesn't see it as a near-term competitor. Oracle argues that although Microsoft is a minor player in the high-end business applications software market now, the tech giant is poised to become a major rival soon.

"Oracle will argue that a large competitor like Microsoft can penetrate and gain share in a moment's notice," Sterling said. "They don't need to invest extraordinary capital and start from the ground up."

Sterling said that if Oracle can show that PeopleSoft "feared Microsoft's wrath" in the business applications software market, that would prove the Redwood City firm's claim that there are more than three major players in that arena.

Analysts say that could come out in PeopleSoft's internal documents or the testimony of its executives.

Ultimately, the question of how the merger would affect the corporate software market will be left to Walker, a respected judge known for his independence and interest in economic issues.

In a sign that he also recognizes the complexity of the issues, Walker agreed to let both sides hold a technology tutorial to help him prepare for the trial.

"There have been very few if any decisions delineating software markets," Sterling said. "The judge will be working from a largely blank slate."